Yeah, confusing terms, You can run a project with the WSP that results in a web application, or you can build a product with the WAP that results in a web site ;-) What's in a name....
Both models have their own advantages. WSP are easier to create and update (also on the server). WAPs follow a more strict pattern, are easier to work with in a team setting and are easier to protect on the server (or more difficult to update, depending on how you look at it). Each type has a different model in Visual Studio and a different compilation model at run-time.
Peter has more on the differences:
http://www.compiledthoughts.com/2008...n-project.html
Cheers,
Imar